Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Presidential Election Forecast Matrix, Stock Market Uncertainty - 29th Oct 20
Stock Market Turning? Look For These Support Levels - 29th Oct 20
Silver: A Conceivable Dead-Cat-Bounce on the Cards - 29th Oct 20
Stocks are Strong but be Aware of this Continuing Pattern - 29th Oct 20
The Most Profitable Way To Play The Gold Boom - 29th Oct 20
Why You Should Hire An Accountant To Complete Your Tax Return - 29th Oct 20
Global Banking: Some Sectors Look as "Precarious as Ever" - 28th Oct 20
Silver Price Minor Dip Possible Before 2nd Major Upleg Starts - 28th Oct 20
�� How to Carve a Simple and Scary Pumpkin Face for Covid Halloween 2020 �� - 28th Oct 20
Gold Price One Last Dip Likely Then Major Upleg to New Highs - 28th Oct 20
Smart Money Is Going All-In On This New Gold Frontier - 28th Oct 20
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Fed’s Manipulations Have Rendered The Yield Curve Useless As a Recession Indicator

Interest-Rates / US Interest Rates Aug 03, 2017 - 05:38 AM GMT

By: John_Mauldin

Interest-Rates

The yield curve has always had an excellent forecasting record.

The Fed’s own wacky policies may have skewed this early-warning system’s reliability, but an interpretive adjustment can restore its usefulness.

This indicator has allowed me to predict the last two recessions.


Here’s what it tells us now—and here’s why you should interpret it through a slightly different lens.

Why The Yield Curve Is No Longer What It Used to Be

The yield curve is simply a chart showing Treasury yields on the vertical axis and maturity on the horizontal axis. 

Below is how it looked at mid-year 2017.

Source: Treasury.gov

Bond traders keep a close eye on the yield curve, and especially on changes in its shape. The curve above is fairly normal. Other things being equal, you expect interest rates to slope upward as time to maturity increases.

That’s because lenders demand higher rates to compensate for the higher risk that comes with lending money for longer periods. The longer you let a borrower hold your cash, the greater the chance something bad will happen to it.

The yield curve’s angle is important, too. It gets steeper when lenders perceive greater risks to long-term loans because, for example, they expect inflation to rise. It’s flatter if inflation risk seems low.

Now, compare the one above with the yield curve of Nov. 30, 2006.

Source: Treasury.gov

Note that yields across the whole curve were higher than they are now. More importantly, the curve is inverted, meaning the short end is actually higher than the long end. At that point investors demanded higher yields for 1-month loans than they did for 30-year loans.

The inverted yield curve historically shows up only when the economy is in a recession or soon will be. An inverted yield curve doesn’t cause a recession but does indicate unusual stress in the market.

Lenders presume the Fed will reduce rates soon, so demand increases for longer-term bonds whose rates are locked in. High demand pushes their prices higher and yields lower. The opposite happens at the short end, so those rates rise, and the curve flattens or inverts.

The inverted yield curve is a classic recession indicator. It inverted in early 2000, right after the Y2K scare proved unfounded and the dot-com bubble was starting to burst. It inverted again in 2006–2007.

Now, since the yield curve is not presently inverted, why am I worried? Because it no longer tells us what it once did.

Short-End Manipulation

Look again at the June 30 yield curve. Now, let’s roll forward to July 20. Direct your attention to the red arrow, where we see a slight inversion forming.

Source: Treasury.gov

On that day, the 3-month Treasury yield exceeded the 6-month yield. It still does today. Why would that be? Well, yields rise (and prices fall) when supply exceeds demand. So fewer people seem to want those 3-month bills.

When is three months from July? That would be October, when there is a fair chance that the US will be embroiled in another debt-ceiling/government-shutdown scenario. T-bills maturing in that period face a slight risk of delayed payment.

The odds are low but still enough to show up in T-bill yields.

US Treasury bills are probably the most liquid fixed-income instruments on the planet. Few markets are more efficient than this one.

Generating this kind of outlier spread isn’t easy, but our crazy political situation is doing it.

The Yield Curve 2.0

The Federal Reserve's tampering at the short end of the yield curve has rendered this traditional predictive device useless.

We have to adapt.

With that in mind, it’s important to note that the 5-year/30-year yield spread has been tightening coincidentally with a slowdown in GDP growth from already low levels. There is the potential for a move from where the curve is now to inversion within a year. Attention must be paid. An outright recession would likely follow, but we’ll feel a downdraft whether the data fits the formal criteria or not.

It’s tough to state that there will be another recession without having the tools to really give a firm prediction. We just don’t have enough good research; so we must be more vigilant, especially in this time of stretched valuations and market sensitivity.

The good news: the yield curve can still be our early warning indicator, with the proviso that we ignore the short maturities and watch the 5-year/30-year spread or maybe even the 5-year/20-year.

You can monitor this yourself by checking T-bond yields on most financial news sites. Find the 30-year yield (or 20) and subtract the 5-yield from it. Right now, the difference is around 1.1 percentage points.

The lower it goes, the closer recession may be.

Join hundreds of thousands of other readers of Thoughts from the Frontline

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules